STRATEGY
Profitunity is Bill Williams magnum opus trading strategy. In our series we’re trading the version from his 2004 book Trading Chaos, second edition.
There are four indicators/concepts that need to be understood to be able to trade Profitunity. They are the alligator indicator, the awesome oscillator, the fractal candle pattern, and the divergent bar, AKA reversal candles. These are used to build the entry signals of Profitunity. Or as Bill Williams calls them, the three wise men.
The first wise man uses a divergent bar in combination with the alligator indicator. It’s trying to catch a reversal at the first sign by looking for a reversal candle. This is where price opens and closes in the same half of the candle. If we have that divergent bar we can check that the candle is suitably far enough from the alligator jaw line, and as long as we have price consistently moving away from the alligator (angulation) that’s when we can set a stop order at the near edge of the candle for that last touch of reversal confirmation before we jump on in. The initial stop loss would be just outside the extreme price of the divergent bar. That stop loss can then be trailed to the extreme price of the previous four bars. We’ll exit the trade and enter in the other direction should the signal swap on us.
The second wise man uses the awesome oscillator. After entering from the first wise man we would expect the awesome oscillator to be moving against us as we’re jumping on a reversal. That being said if the move goes how we want it to, we can expect for the momentum to shift. Once we get three awesome oscillator histogram bar closes in the direction of our trade we can set a stop order again at the near edge of the candle. If momentum continues how we want it to that stop order will trigger and we’ll be in an extra trade. The stop loss will go just outside the extreme price of the candle for the third histogram bar. This will then be trailed to the extreme price of the previous four bars, and we’ll exit the trade should we get three awesome oscillator bars close against our trade.
The third wise man uses fractals as breakout points. For example if you’re in a buy trade from your first wise man you can be on the lookout for bearish fractals which appear above the price. You can then set a stop order just above the high of the candle with the fractal symbol above it, so if price breaches that level it will get you into an extra buy trade. All you need to make sure is that the candle with the fractal isn’t touching the teeth (mid-length) moving average of the alligator. The stop loss will go just outside the extreme of price for the candle which has the fractal that gave the breakout. We’ll then trail the stop loss to the extreme of price for the last four candles. We can allow ourselves up to three consecutive fractal breakouts in the same move if we were to be blessed with such a long trend.
In the book it states that it is no problem to take any of the wise men in any order, however we want to try and keep some order over our strategy. So, unless we are struggling for entry signals we will always look to get in off the first wise man (the divergent bar) first. Although we don’t mind which order the second or third wise men come after that.
For our risk we’ll use the inverse pyramid which was suggested in the book. Our initial entry from the divergent bar would be worth 1x risk. It’s a dangerous trade so we don’t want to go overboard with it, but if it does turn to be a hit then the inverse pyramid begins. The second entry would have 5x risk, the third entry would have 4x risk, the fourth entry would have 3x risk, and the fifth entry would have 2x risk. If we were to get a five trade move that would be 15x total risk. 1x risk will be worth 0.2% of capital to the initial stop loss.
The full PDF book of Trading Chaos is linked below, and a summary of the key parts of the book for the Profitunity strategy is linked too. Get trading.
pdfroom.com/books/trading-cha...
forextraderportal.com/trading-...
ALLIGATOR
• Alligator Indicator Ex...
www.investopedia.com/articles...
AWESOME OSCILLATOR
• Awesome Oscillator (AO...
www.babypips.com/forexpedia/a...
FRACTALS
• Fractals Explained | P...
www.investopedia.com/terms/f/...
REVERSAL CANDLES
• Reversal Candles Expla...
www.babypips.com/learn/forex/...
AVERAGE TRUE RANGE
• Average True Range (AT...
www.investopedia.com/terms/a/...
TWITTER
/ projecttrade365
All for entertainment purposes only.